A&L takover - what you need to know

The clock is ticking for Alliance & Leicester shareholders - with the Banco Santander takeover imminent, This is Money's investment correspondent Phil Scott, looks at what investors need to know.

Takeover: But will Alliance & Leicester investors be happy with Banco Santander?

A&L and Banco Santander

The fifth-largest bank in the world, Banco Santander, is also the third most commonly held company among UK private shareholders, after BT and Halifax Bank of Scotland.

The primary reason behind its sizeable amount of investors is Santander's purchase of Abbey National in late 2004, which brought with it a further 2m investors. Today some 1.2m Britons own Santander shares.

That figure is about to rise by some 500,000 as Santander's takeover of Alliance & Leicester will draw more shareholders into the Spanish fold.

The takeover was originally announced in mid-July following the hit Alliance & Leicester endured as a result of the credit crunch.

Over the past 12 months, it has witnessed its share price nosedive by 70% - and by 45% over six months – over which time it has been, by a market consensus view, consistently considered a 'sell'.

Given the ongoing market turmoil, especially in the banking sector, investors are understandably nervous – and both current and future shareholders in Santander face a significant choice - should they hang on or sell up?

Richard Hunter of Hargreaves Lansdown Stockbrokers says: 'Investors need to be aware of the tax implications by staying invested, I suspect however that many smaller investors will take the opportunity to sell-out though.'

Shareholder options

So what are the options for the 500,000 A&L shareholders ahead of the Santander take over – they have until Friday, October 10 to decide what to do.

If, as expected, the bid from Santander is approved; as there is no cash offer, investors can either sell or hang on to their shares and if they opt for the latter, they then need to tackle some tax arrangements.

The taxation arrangements include an 18% charge on Santander dividends, which can only count towards your UK tax bill if a special Spanish tax form is submitted and a full tax return is made to the HMRC, and obligatory submission of the special Spanish tax form within a month of selling Santander shares, failing which you could be fined €100 or more.

Gavin Oldham, of stockbrokers, The Share Centre, says: 'Investors who opt to sell, but who would like to reinvest in an alternative UK bank could look at HSBC or Barclays, both of whom we currently hold as medium risk shares.'

Customers who received 250 shares when Alliance & Leicester was demutualised in April 1997 had an initial holding valued at £1,332.

'Since then, a total of £1,182 of dividends have been, or will be, paid. But the shares are now worth just £741 (at the closing price on 5 September) as the bank has been hard hit by the credit crunch,' adds Oldham.

Arguably, the returns yielded by the one-time Abbey shareholders would infer that Santander is an excellent prospect for investors. After all, the shares have increased a respectable 40% since the takeover against a considerable slide of some 31% by the FTSE banks index.

But what's the bottom line? For every share they hold, A&L shareholders will get a third of a Santander share plus 18p. The cash element reflects a dividend that Santander has committed to pay based on A&L's results.

Santander could well be one of the better performing banks in the coming years, but a number of uncertainties might mean it is no longer attractive to UK investors.

Despite its growth since the Abbey takeover, experts feel it would be overly optimistic to expect the past performance to be mirrored in the future, given the market slowdown. In addition the Spanish house price crisis has not, as of yet, hit the banking sector badly, but it is likely to and Santander will not be immune from its claws.

However, unlike many, Santander has steered clear of subprime loans in America and also providing a counterbalance to the market problems is its exposure to emerging markets. In 2007, it took over ABN Amro's Brazilian business and Latin American banking makes up 10% of Santander profits – and that is forecast to soar to 30% in the near future.

Don't forget the pound

But there is one other major issue both present and future shareholders must not ignore, and that is the exchange rate. Right now, sterling is weak against the euro, however that could change. As European growth slows we might see the euro slide back, meaning that any gains in the Santander share price may, for UK investors, be washed away by a decline in the value of the euro.

One euro is presently worth about 81p but since its existence the average value has been some 67p and if it pulled back to that level it would knock more than 15% off the sterling value of Santander shares and any dividends paid. Some experts argue that Santander may well be one of the better banks to hold going forward but there may be better opportunities elsewhere, particularly for sterling based, UK investors. Time will tell.